Saturday, May 14, 2016

Choice Of Technique And Search Models Of Labor Markets

I do not have an analysis or example to go with this post title. I suggest this would be an interesting research topic. What are implications of the analysis of the choice of technique, if any, for search models of labor markets?

Consider the neoclassical theory of supply and demand in labor markets under perfect competition. We know (Opocher and Steedman 2015, Vienneau 2005) that that theory is fatally undermined by an analysis of cost-minimizing firms.

I have recently read an overview, by Steve Fleetwood (2016), of models of search and matching in labor markets. And he illustrates these models with graphs of two crossing monotone curves that, at a glance, look much like labor supply and demand curves. But these curves are drawn in a different space and have a different rationale and derivation than labor supply and demand curves. A wage curve is graphed with the job creation curve. The abscissa is the tightness of the labor market, as measured by the ratio of vacancies to unemployment. The ordinate is the wage, as in the mistaken introductory story. The wage curve is also graphed against the Beveridge curve in a different space, namely, with the present discounted value of expected profit from a vacant job against unemployment.

In a long run analysis, a higher wage is associated with a lower rate of profits. This wage-rate of profits curves has implications for present discounted values. I do not see why an analysis inspired by Sraffa could not undermine search models. But one would have to go further than this to confirm this intuition. And one would need to read some of the original literature.

I do not claim that search models might not have some use in a reconstituted economics.